Geeks vs the Government | Game On - Part 1/3

••• today's entry continues here below •••

S&P Warns of "Perfect Storm" Brewing in Global Credit Markets

Perhaps even more unsettling is a new report from S&P ..

.. that warns of a "Perfect Storm" currently brewing in our Credit Markets ..

.. with winds that have been calculated to reach speeds of 46 Trillion miles per hour by the time it makes landfall.

Hold on to your financial hats. [ Podcast posted » here. ] Some sites call this warning a ploy.

You remember S&P. Standard & Poors. They're the folks who downgraded U.S. debt last summer (.. the nation's first-ever downgrade). And are threatening another downgrade, when they said:

"Recent shifts in the ideologies of the two major political parties could raise uncertainties about the government's ability & willingness to SUSTAIN public finances consistently over the long term."

Fitch has also threatened to downgrade U.S. debt if Congress can't get its fiscal shit together.

Then there is Nouriel's Perfect Storm. So take your pick. Choose your poison.

Derivatives #1 Biggest Threat to Economy

The thing however, that MOST concerns me (.. and scares the bejesus out of many people much smarter than me) .. are » the DERIVATIVES ..

.. because they remain unregulated (.. as Brooksley can confirm) and everybody acknowledges that they were at the very heart of the 2008 meltdown.

There is a reason WHY, after a brief introduction, the mind-blowing 4-hour Frontline special, titled » Money, Power & Wall Street, BEGINS with an explanation of DERIVATIVES ..

.. what they are .. from whence they came .. who came up with the idea .. how the idea originated .. and how these derivatives themselves came into being. [ Truly fascinating. ]

The REASON (it slowly comes into focus) is that » these derivatives are  how/why/where our financial crisis BEGAN. The root of the cause.

And they're still there. Nothing has changed. Derivatives remain unregulated. They represent the Wild, Wild West of financial instruments. "Financial weapons of mass destruction" they have been called.

Capitalism is about profit and loss. When companies make a long series of bad decisions, they eventually go bankrupt, creditors take a loss and the markets move on. No moral hazard.

So why isnt this happening? Why isnt Capitalism being allowed to work? Why are bankrupt institutions being bailed out?

One reason » derivatives. A tall stack of financial derivatives .. towering much higher than you could ever imagine.

Financial derivatives were invented by the United States (at JP Morgan), and everybody still remembers that it was problems at US banks, and with the US credit markets, which catapulted the the entire world into the financial mess we find ourselves still mired today.

The term subprime still carries ominous implications when spoken aloud .. with an effect that causes the Rest-of-the-World to lose trust in the Leadership capablities of the United States government.

Because every time you guys make another boneheaded-mistake, folks around the world naturally become less likely to listen (.. no matter HOW much money you give them).

The reason banks don't want the Derivative "market" regulated .. is cuz they can MAKE A SHITLOAD OF MONEY. The problem however .. is that (.. similar to the situation you find at a Las Vegas casino) they can also LOSE a shitload of money.

And that's where the American taxpayer comes in .. to the rescue of stupid gamblers placing stupid bets with government-backed money.

These companies can LOSE so much money that our ENTIRE ECONOMIC SYSTEM is put at risk. Are profit$ really worth that much to them? [ Apparently they are. ]

Warren Buffett, a man who happens to know a little something about investing and the way financial markets work, called derivatives » "financial weapons of mass destruction."

[ You might want to re-read that last sentence, paying particular attention to the qualifications of the author, an 81-year old man admired round the world for his folksy investing wisdom ("the Oracle of Omaha," they call him) ..

.. not infallible, but certainly one of the greatest investors of all time, and someone who has spent his entire adult life studying the financial markets. There's nothing flashy about the man. His results speak for themselves. ]

My question, then, is » why, pray tell, would you not regulate the very thing that is jumping up & down, shouting, "I did it! I did it! Me! Over here! I'm the one who came |THIS| close to taking down your entire economy, Me! Captain Derivative!" ??

I'll leave that question rhetorical for now. Ben? Richard? James? Anybody?

Cuz if the taxpayer has to bail-out Wall Street again .. it will not be pretty ..

.. especially if the reason is because the government shuns its responsibility to provide necessary regulatory oversight .. cuz they are inBEDwith Wall Street.

The real troubling thing however .. is that this might not even be the worst scenario. Because this article at Investopedia (6th paragraph) estimates the derivative market to be (.. long-ass drumroll, please) » $516 Trillion.

That's right » $516 Trillion. It's not a type-o. Compare that with our accumulated national debt, which, at nearly $16 Trillion, is itself a mind-blowingly big number. 16 vs 516.

In other words, the market is TOO BIG to regulate. Too-Big-to-Fail banks operating in a Too-Big-to-Regulate market .. a market that has been called a "ticking time bomb".

And that article was written back in 2008. God only knows how big the market is now. Tho Senator Byron Dorgan says at t=20:00 in video #1 posted here .. that in 1999, there were $33 Trillion in derivatives held by United States banks & financial institutions.

This article says that NOW our 9 largest banks hold a total of $230 Trillion in Derivatives .. 3 times the size of the entire world economy .. which is roughly $70 Trill .. give or take.

So .. $33 Trill at/near the beginning of 2000 to $230 now in 2012. Notice anything about that growth rate? If my math is correct, that's a ~600% increase in dozen years. What effect is this having on the stability of our economy?

Speaking of $70 Trill .. of these BANKS, JP Morgan has the most, holding $70 Trillion worth of Ticking Derivatives (TD's).

No government in the world has money for this kind of bailout. Here's a book about TD's titled » "Traders, Guns & Money." [ What?! No lawyers? You must be shitting me. ]

Grexit = Greek Exit | Disorderly = Chaos

And nobody really knows WHAT would happen if Greece leaves the Euro (.. called a 'Grexit'), or if the Euro blows up .. seeing that the EU is an economic union which some call "Inherently Flawed" (.. by design) .. because it is governed by many different political systems (governments).

This plays well, I feel, to the point I made near the beginning of my New Years eve entry .. in my "collegiate coincidence sidebar" ..

.. where I said that the Economic system is inextricably entwined with the Social / Political system .. and that they are impossible to separate.

As tho one defines the other, and cannot exist without the other. Does it not?

Now you might think it would be no big deal for the EU to flip off the Greeks with a flying atomic raspberry and say,

"Gimme back my EU coins & hit the Currency Road, Jack .. all the way back to your broke-ass little island."

BUT! [ Pause for effect.] There's a problem with that. A big problem. A DEBT problem.

Remember how the credit markets of the entire GLOBAL economy seized up back in 2008? (How could we forget?) Some say a Grexit could be worse than when Lehman Bros failed.

While the Economics editor of the Economist magazine (Ms. Beddoes) says (at t=0:50) that a Grexit "could precipitate a financial crisis WAY WORSE than Lehman Bros."

And the best explanation I heard is that » "The SYSTEM is designed such that every chain in the system depends on every other chain holding up its end of the bargain .. and if ANY ONE PART of the system breaks down .. then the WHOLE thing IMPLODES."

It's all interconnected via a type of financial derivative called a Credit Default Swap.

"Jamie, could you please come over here and explain to the folks how a CDS works?" It's a like a BET .. that a person/party will or won't pay their debt.

At t=9:40 in the 1st video posted here, they say that a CDS is "a kind of financial derivative that insures a loan against default" .. by paying someone else (another company) to assume the responsibility associated with the RISK of that loan going bad. 

CDS's allowed banks to "skirt" capital requirement safeguards (see t=12:30 in video #1 posted here). The problem here is twofold:

1. governments (such as Greece & Spain & Ireland), just like companies (such as AIG & Bear Stearns & Lehman Bros) & citizen-consumers (such as you & me) can't pay what they/we dont have.
   
   
[ Remember AIG and the $85 billion bail-out? They couldnt pay. Also Lehman. Hank hated the gorilla Dick Fuld so he let Lehman fail .. relishing the event I would imagine.

And just like that goes Goldman's biggest competitor ..  down the drain .. largest bankruptcy filing in US history. Ever. A company that was founded in 1850 .. in Montgomery, Alabama.

Meanwhile, Goldman Sachs was founded 1869. And Bear Stearns » 1923. Bear Stearns was bought by JP Morgan, which traces its history back to 1799. ]


2. winning your derivative bet means you might actually end up breaking the system, or a good part of it. [ If the party has so many losses that they can't pay .. like AIG.
   
   .. which is why some are calling for Credit Default Swaps to be not merely regulated, but OUTLAWED outright.]

I heard the explanation about how derivatives work .. that if any one part of the chain breaks, then the whole system implodes .. from Satyajit on Money, Power & Wall $treet .. tho I cant tell you the exact timecode right now. I'll see later if I can find it for you.

So .. even tho Greece is considered a pissant little economy, it has the potential to wreck havoc in the financial markets .. especially is they get pissed off. [ This page answers the question "Who loaned Greece money and how much? ]

If this is true, and Greece knows it, then this knowledge could allow them to drive a hard bargain. No? Which might be exactly what they are doing.

Cuz Greece seems to be saying, "Show me the bailout money, but you can forget about that austerity baloney .. like you did with Spain. Homie dont play no austerity game."

And Germany seems to be saying, "No austerity ticket, no uber ride on the German Bailout Express."

But how the EU handles Greece will be a big thing, a big deal, significant .. because:

1. It will set precedents.
2. Spain is next. And Spain has a much bigger economy.
3. Italy is also looking a little green around the economic gills .. with Europe's highest debt-to-GDP ratio.
4. Even France is starting to feel the pressure, having its debt downgraded to a step or two from "junk" status.
5. All this affects Germany, who seems to be the only one who can hold the Euro Zone together.

I mean, it would not be very difficult to fuck things up .. seeing such a thing has never before been attempted.

Given the recent near-cataclysmic page of history that our greedy economic leaders have already written for us, I am naturally wary about their assurances of success ..

.. in executing the Greek big-toe amputation without killing the Euro-patient .. and infecting the rest of the world.

They call it "contagion." Contagion is the result of the world's newfound interconnectedness. "The global economy" looked like a good thing .. until all the world's economies became inDEBTed to each other (.. some more than others).

That is the point of infection .. the thing that provides a conduit for contagion.

In the 3rd slide listed here, titled "Risk of Contagion" they quote a Harvard economist named Kenneth Rogoff as saying that the Euro Zone is "the ultimate contagion machine."

The term they use to describe a scenario whereby things get really fucked up .. is » disorderly. A disorderly exit. This cracks me up .. cuz, as everybody knows, Disorderly is a town on the road to Chaos. =)

And it is difficult to imagine a scenario by which a Greek exit would be orderly. If I was Greece and exiting from the EU, I would put on some James Brown and turn it up. Papa dont take no mess. =)

I could be wrong, but it seems like this would give the Greeks a certain amount of bravado .. arrogance, even .. as could only be demonstrated by the nation who invented Civilization itself (.. okay, they'll settle for Western Culture). "Moderation in all things," right?

But anybody who can spell 'World War' knows that the Germans have gotten a shitty deal .. more than once .. and I suspect they are more than a little FED UP with getting the shitty end of global economic stick. Wouldnt you be? I mean, that is the very thing that caused WW2.

Cuz .. "to the victors go the spoils" .. and this time around, they have taken a commanding position .. which allows them call the shots. "My way or the highway."

And everybody knows that Germany would have to be the main source of financial salvation for the Greeks (.. and the entire Euro Zone) .. cuz they're the only ones who still have an operating economy .. that has any kind of real money (.. or even better » CREDIT).

What would you do if you were Germany?

The head of German Banking says here (at t=0:25), "We can't go on like this forever, dude."

Only he doesnt say, "dude."

The German people themselves (not necessarily their politicians) feel that the economies of the Southern countries (such as Greece, Spain, Italy, Portugal) .. represent a financial "bottomless pit."

Seems to me that the German have no reason nor desire to keep bailing out the endless line of faltering economies, especially now that it's starting to get expensive with Spain.

I bet they say something like » "Nothing personal, but we're tired of giving you Greeks so much money that we know you're never gonna repay .. cuz that's how you Greeks are."

The term 'brinkmanship' has been used to describe the interplay between Greece & the EU/Germans.

The word is defined as » "The art or practice of pursuing a dangerous policy to the limits of safety before stopping, typically in politics."

Interesting quote posted here (1st & 2nd paragraphs):

"The Tokyo market slumped to a 28-year low on Monday as Asian shares dived on fears of a nightmare scenario of euro-zone breakup, U.S. economic relapse and a sharp slowdown in China."

"The Nikkei last week marked its 9th straight week of losses, the longest such losing streak run in 20 years."

Interesting quotes here. For example (2nd paragraph):

"The European Commission's top economic official, Olli Rehn, warned that the single currency area COULD DISINTEGRATE without stronger crisis-fighting mechanisms and tough fiscal discipline."

and another quote, mid-way down the page/article, just after the heading titled "EDIFICE AT RISK:

"Another ECB policymaker, Bank of Italy governor Ignazio Visco, went further, saying political inertia and bad economic decisions had put "the entire European edifice" at risk and only a clear path to political union could save the euro."

Sounds dire, no? Here's another eyebrow-raising quote (5th paragraph):

"Europe's problem, much like in the United States in 2008, is that its financial SYSTEM IS FRAYING. Troubled countries and weakened banks alike have difficulty borrowing money to sustain their operations as nervous investors pull back from risk."

Curious quote posted here (3rd paragraph) that says the Currency Union "largely benefits the more prosperous members like Germany." Really? I didnt know that.

And here's the most eye-popping quote that I've read since beginning my research for the New Years eve entry.

From Alexis Tsipras of the Syriza party, Greece. He says (2nd paragraph answer to 1st question):

"At the same time, we will try to restore faith in the law and convince people that the state is equitable and effective.

We will destroy corruption and the interconnection of political and economic power from its roots."

Corruption and cronyism have long been a problem in Greece and is the main reason cited for its current economic predicament.

Because such "interconnection" is what my New Years eve entry was all about. "At its roots" .. uh, that would be » the palm, Alexis. (People have been assassinated for saying less inflammatory things.)

Here's what I said about "destroying the interconnection (corruption) of political and economic power" .. in my New Years eve entry (~¼ down the page):

"Seems to me that .. when the wealthy & the powerful both want the same thing (.. such as a mechanism for getting more wealth and more power) .. uh, such a mechanism shalt not be easily disabled."

In the case of Spain, it must be a gut-wrenching place to be in .. being faced with a decision to have foreign powers take control over and dictate their financial decisions .. in order to get the money they so desperately need. But what else can they do?

Talk about being between a rock and a hard place. Seems almost like selling your soul .. a concept that many believe the German people invented.

A good 9-minute video is posted at the end of this article. In it, the former Deputy Treasury Secretary Roger Altman says (at t=30 secs): "The moment of truth for the Euro Zone is rapidly approaching."

His Op Ed is posted » here (Washington Post). I was struck by the sobering quality of the phrase » "moment of truth". Because he does not seem like a man given to hyperbole.

I have also heard it called the "Moment of Reckoning" for Europe.

Another quote that popped out at me came from this guy, who says (at t=0:50 secs) » "Greece always had the threat of causing contagion, but Spain IS infected."

And people are concerned it will spread to Italy, whose economy is even bigger than Spain's. (Only France & Germany are bigger than Italy.)

A key point here is that Germany has already BEEN THRU this austerity stuff. And it was no fun for them. So they think »

» "If we can do it, then you can, too. And we'll be damned if we persevere thru the hard times in order to get where we are now .. then turn around and bail out your sorry asses with our hard-earned money. We're not gonna trash our economy for you spendthrift low-lifes"

Unlike the United States & the our Federal Reserve, Germany & the ECB take seriously moral hazard. That's a cultural difference.

If you check out this interactive (rollover) overview of who owes what how much, you can see that Spain owes France TWICE as much as it owes Germany .. and Italy owes France a humungous amount, while it (Italy) owes Germany nothing.

In other words, a default by either Spain or Italy would hurt France FAR MORE than it would hurt Germany. Think about it.

Rating agency Fitch recently downgraded Spainish debt by a dramatic 3-steps .. almost to junk status.

Here's an interesting development that says France is now teaming up with Italy and Spain to take on Germany. I wonder if this stirs in the German people any old memories .. any unresolved issues? How can it not?

Meanwhile, France had the Credit Rating on their debt downgraded several steps to bbb+ .. which can't be good. Anything rated below bbb- is considered "junk" (non-investment-grade).

What's that cracking sound? It's the sound you hear right before an irresistable force hits an immovable object. 

Dr Laura says Disorderly Greek Exit #1 Biggest Threat to Economy

The impressively pedigreed and papered Berkeley professor Dr. Laura Tyson, who holds a PhD in Economics from MIT and who sounds very rational, says HERE (at t=2:10):

"The biggest danger to the World Economy and to the U.S. economy is a disruptive, disorderly exit of Greece [ from the Euro Zone ] which causes a major seizure of Credit Markets in Europe.

The European banking system is the largest in the world and is very CONNECTED to the banking systems of the rest of the world.

So you can't rule out the possibility of some dramatic seizure of capital markets. That's the greatest risk. It's not the recession in Europe itself."

She says all this while holding out her hands .. as if unconsciously trying to contain the problem. =)

If I'm not mistaken, she was one of the people interviewed for the Commanding Heights video ..

.. which formed the basis for my original post on New Years eve. I had been watching that video for much of December, just before bed. (Made for great dreams.)

I remember replaying that section over a few times. Then again, there were many sections that I replayed over & over (.. out of disbelief).

Oh yeah, I found her. Here she is. I knew it. (She seems smarter now.)

At t=5:50 in this video, these guys say that Greece falling out of the Euro would be WORSE than Lehman Bros, which is what nearly took down the entire US economy in 2008. "Worse," they say .. these guys who have been following the crisis since day 1.

And I should remind you what was said by the Economics editor of the Economist magazine (Ms. Beddoes) (at t=0:50) that a Grexit "could precipitate a financial crisis WAY WORSE than Lehman Bros."

The head of Britian's Treasury Dept said (at t=0:50), "This is an exceptionally grave moment for the whole world economy." The video is less than 3 mins, but you might wanna grab a beer before watching it. Sobering. The "whole world economy," he said.

Here's an article posted at Time, titled » Euro Crisis: Why a Greek Exit could be Much Worse than Expected. Subtitled » More than one kind of damaging domino effect is possible if Greece is forced to abandon the Euro. It is the best article I've been able to find on the subject.

Here are a few more good ones »

1. Greek Exit May Exceed 1 Trillion Euros (Bloomberg)
2. Facing a Teetering Greece, Europe Plans for the Worst (NYTimes)
3. The euro's parachute drop has no end in sight (CNN Money)

The Euro has fallen to its lowest level in 2 years on Grexit fears.

Meanwhile, Plosser says that the escalating Euro-crisis might actually HELP the US economy.

But Bullard counters by saying, "Europe is a potential risk to the global economy and it is up to European governments to follow a plan that reassures financial markets they can repay their debt."

It will be interesting to see who has the more accurate crystal ball.

This article at Forbes, titled "Now Spain Circles the Drain," says that Spain's problems are above and beyond and separate from those related to the Grexit. In other words, even if Greece doesnt exit, Spain is still in a world of hurt.

And Spain's has a MUCH bigger economy than Greece. Spain has Europe's 4th largest economy (.. after Germany, France & Italy).

Stiglitz Clarity

Of all the research I've done regarding the Euro Zone's problems .. THIS video (6 mins), which features an interview with double-Nobel laureate Joseph Stiglitz of Columbia (NYC), sheds the most light.

[ My Navy buddy, the Dog, graduated from Columbia. Civil Engineering. ]

Here are some eyebrow-raising quotes. At t=3:00 mins, Stiglitz says:

"It's a vicious cycle. There's only one solution » a unified financial system. A banking system for the whole Euro area. Which means you cannot rely on the Spanish government to bail-out the Spanish banks. It must be a European banking system with European finance backing all the European banks."

At t= 5:40, he says:

"The question is, are they [Europe] at the point where there's nothing more they can do? I think they're almost there. A European-wide guarantee on money in deposit in Spanish banks is necessay to make people feel safe about depositing their money.

But Germany says, 'We won't do that; we won't bear that risk.' That's a STALEMATE. And if they don't do that, the system FALLS APART FAIRLY QUICKLY."

Is that video saying what I think it's saying? Very illuminating. Must-see. Easy to see why Stiglitz has started himself a collection of Nobel Prizes.

See here tho, for an apparent contradiction.

[ As a crafter-of-words myself, I confess to admiring the way Stiglitz is able to craft such clarity into his writing. Is that him? Or does he have a gifted editor? His speaking-interview is also mui claro, so I suspect the Stiglitz clarity comes from the man himself. ]

Speaking of stalemates .. notice that Bernanke has also suggested (2nd paragraph) that Republicans & Democrats are likewise at a STALEMATE [.. a term the President himself, at t=4:50, has begun using ..] over how to deal with the infamous Fiscal Disaster (uh, I mean » Cliff).

And speaking of good videos, Bernanke says here (bottom of article) at t=5:50:

"The situation in Europe poses significant risks to the U.S. financial system and economy and must be monitored closely."

Does Ben not look horrible in that video? Like he hasnt slept in days? (Nice tie, tho.) Check out the look he gives when he says the words, "must be monitored closely." Then check out the looks on the faces of the guys sitting on the panel. Priceless.

In keeping with the tenets of web site optimization, today's entry has been broken into THREE PAGES. Part 2 is posted here » Geeks vs the Government | Game On - Part 2